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Pricing Decisions and Insider Trading in Horse Betting Markets

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Author Info

  • A. SCHNYTZER

    ()

  • V. MAKROPOULOU

    ()

  • M. LAMERS

    ()

Abstract

This paper builds on a theoretical model by Schnytzer, Lamers, and Makropoulou (2010) that conceptualizes fixed odds horse betting markets as implicit call option markets. We model the decision making process of a bookmaker that sets his prices under uncertainty. We extend the paper of Schnytzer et al. (2010) by relaxing some assumptions and allowing for betting at multiple time periods. We show that when a bookmaker follows this pricing process built upon implicit options, the returns will exhibit a favorite-longshot bias. By performing Monte Carlo simulations we generate the option values and are able to measure the degree of insider trading, which we find to be around 60% in our dataset.

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File URL: http://www.feb.ugent.be/nl/Ondz/wp/Papers/wp_12_772.pdf
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Bibliographic Info

Paper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 12/772.

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Length: 18 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:rug:rugwps:12/772

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Keywords: Betting; Insider Trading; Contingent Pricing;

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References

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  1. Adi Schnytzer & Martien Lamers & Vasiliki Makropoulou, 2010. "Measuring the Extent of Inside Trading in Horse Betting Markets," Journal of Gambling Business and Economics, University of Buckingham Press, vol. 4(2), pages 21-41, September.
  2. Adi Schnytzer & Yuval Shilony, 2002. "On the timing of inside trades in a betting market," The European Journal of Finance, Taylor & Francis Journals, vol. 8(2), pages 176-186, June.
  3. Shin, Hyun Song, 1991. "Optimal Betting Odds against Insider Traders," Economic Journal, Royal Economic Society, vol. 101(408), pages 1179-85, September.
  4. Vasiliki Makropoulou & Raphael N. Markellos, 2011. "Optimal Price Setting In Fixed‐Odds Betting Markets Under Information Uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 519-536, 09.
  5. Quandt, Richard E, 1986. "Betting and Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 201-07, February.
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